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Wednesday, 10 July 2013

Options to go easy on defence FDI

The government is planning to work its way around defence minister A.K. Antony’s refusal to increase the foreign direct investment cap in the sector by allowing up to 49 per cent FDI on a case-to-case basis and up to 26 per cent on more relaxed terms, though after clearance from the Foreign Investment Promotion Board.

India has at least two defence deals where Hindustan Aeronautics (HAL) is in a 50:50 joint venture with Russian firms. In December 2006, HAL inked a deal with Russia’s Irkut Corporation to develop and make a 60-tonne multi-role transport aircraft. While HAL joined hands with Ilyushin Design Bureau of Russia to design the aircraft, it manufactured the aircraft in Kanpur with Irkut.

In December 2010, HAL signed another 50:50 deal with Russia’s Rosoboronexport to build a stealth fifth-generation fighter jet armed with Indian weapons such as the Astra missile. The two joint ventures were allowed because they were cleared by cabinet committees and seen as vital to the country’s defence.

Though the projects are running behind schedule, the two deals are being seen as examples for similar joint ventures with foreign companies, which need to meet offset norms set by New Delhi.

Under the offset clause, foreign firms selling weapons and aircraft have to engage Indian companies for at least 30 per cent of the value of the contract. However, countries such as the US are open to the offset clause, provided the foreign investment cap is raised.

Diplomatic lobbies have even been making a case for 74-100-per-cent stakes to foreign investors, arguing that only a greater say in their Indian ventures will make them comfortable to bring in proprietary technology.

However, domestic players such as the Tatas, Mahindras, Reliance and L&T have opposed such easy norms. They are comfortable with expanding the FDI limit to 49 per cent so that they remain in majority control, a view which industry and the finance ministry now seem to endorse.

It is felt that such joint ventures can stand up on their own eventually, just as Japanese and Korean car makers did in their alliances with western auto companies.

Officials said clauses for joint research and transfer of technology could be made mandatory for FDI beyond 26 per cent and up to 49 per cent, which may also be an answer to concerns raised by Antony.

Antony views

In his objections to raising the FDI cap, Antony had written to commerce minister Anand Sharma stating that “allowing foreign companies to set up manufacturing/assembly facilities here will be a retrograde step as it will stymie the growth of indigenous design and development, and our dependence on foreign countries and OEMs for modern weapons will get perpetuated”.

India’s attempts at developing weapons have been plagued by time, cost over-runs and faulty products. The state-run Defence Research and Development Organisation has been struggling to build a good tank, a fighter jet and even an assault rifle, though Indian scientists have produced world-class missile systems and rockets.